St. Louis Union Trust Co. v. Finnegan

• Decision Date: 03 July 1952
• Docket Number: No. 14523.,14523.
• Citation: 197 F.2d 565
• Parties: ST. LOUIS UNION TRUST CO. v. FINNEGAN, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Eighth Circuit

197 F.2d 565 (1952)

ST. LOUIS UNION TRUST CO. v. FINNEGAN, Collector of Internal Revenue.

No. 14523.

United States Court of Appeals Eighth Circuit.

July 3, 1952.

R. H. McRoberts and William C. Connett, IV, St. Louis, Mo. (Bryan, Cave, McPheeters & McRoberts, St. Louis, Mo., were with them on the brief), for appellant.

Melva M. Graney, Sp. Asst. to the Atty. Gen. (Ellis N. Slack, Acting Asst. Atty. Gen., Homer R. Miller, Sp. Asst. to the Atty. Gen., George L. Robertson, U. S. Atty., and William V. O'Donnell, Asst. U. S. Atty., St. Louis, were on the brief), for appellee.

Before GARDNER, Chief Judge, and THOMAS and JOHNSEN, Circuit Judges.

THOMAS, Circuit Judge.

This is an appeal by the plaintiff from a judgment for the defendant in an action brought by the St. Louis Union Trust Company as executor of the estate of Herman J. Sternberg, deceased, against James P. Finnegan as collector of internal revenue for the United States, to recover $223,805.34, taxes and interest paid under protest based upon gain from the sale of the assets of Central States Collieries, Inc., which had been distributed as a dividend in liquidation to the plaintiff as its sole stockholder and subsequently sold.

In his answer to the complaint the defendant denied the right of plaintiff to recover and pleaded two affirmative defenses of recoupment and estoppel. At the trial counsel for the parties agreed that if plaintiff were entitled to recover, the correct amount of the judgment would be $162,515.13; and that if the defendant were entitled to recover on any of his affirmative defenses for recoupment the correct amount of such recovery should be either $77,342.96 or $64,720.03. The court having found for the defendant upon the complaint did not consider or pass upon the defendant's claim for recoupment.

The Central States Collieries was an Illinois corporation. All of its shares were owned by Herman J. Sternberg, who died January 10, 1944, and the title to such shares passed to the executor of his estate. The corporation voted to liquidate on May 1, 1944, and all of its assets passed to the plaintiff and by it were sold on May 17, 1944. The Commissioner of Internal Revenue assessed taxes for the gain on the sale to the plaintiff as transferee on the theory that the sale was in fact made by the corporation. The plaintiff paid the taxes with accrued interest on April 14, 1947, and thereafter filed with the Collector a claim for refund which was denied, and this action was then commenced.

The validity of the assessment by the Collector depends upon whether the sale of the assets was made by the corporation or by the executor.

The law is that "A corporation selling its physical properties is taxed on capital gains resulting from the sale 26 U.S.C. § 22(a); Treas. Reg. 103, § 19.22(a)-19. There is no corporate tax, however, on distribution of assets in kind to shareholders as part of a genuine liquidation Treas. Reg. 103, § 19.22(a)-21." United States v. Cumberland Public Service Co., 338 U.S. 451, 452, 70 S.Ct. 280, 94 L.Ed. 251.

The trial court determined as a matter of fact and as a conclusion of law that "In substance, the sale was made by the corporation, and the plaintiff, as executor, was merely a conduit for carrying out the sale. For tax purposes, the gain attributable to the sale was that of the corporation and was properly included in the corporation's taxable income for the period involved by the Commissioner of Internal Revenue."

The case was tried to the court without a jury. The opinion of the court is reported in D.C., 100 F.Supp. 1020. The question for consideration here is whether the court's findings are clearly erroneous. Rule 52(a), Rules of Civil Procedure, 28 U.S.C.A.

The plaintiff contends that the court erred in finding and holding that the sale of the assets was made by the corporation and not by the executor as the sole stockholder. The determination of this contention requires a somewhat detailed review of the evidence.

Herman J. Sternberg was a citizen of Missouri. He left no children. He devised his estate, valued at more than $1,000,000, to his brothers and sisters and their heirs, and named the plaintiff as executor. He had been married about six months prior to his death. His will was executed several years prior to his marriage and was not changed thereafter. The widow, unprovided for in the will, succeeded, under the law of Missouri, to the ownership of one-half of the property of the estate. After the executor had qualified as such in the probate court of Missouri, its officers soon discovered that cooperation with the heirs would be difficult, and for that reason determined to obtain court orders approving its acts in all matters connected with the administration of the estate. The nature of these difficulties is disclosed in litigation carried through the courts. See Sternberg v. St. Louis Union Trust Co., 394 Ill. 452, 68 N.E.2d 892, 169 A.L.R. 545; In re Sternberg's Estate, Mo.Sup., 204 S.W.2d 761; Sternberg v. St. Louis Union Trust Co., 8 Cir., 163 F.2d 714.

In the previous litigation carried on in the Missouri and federal courts concerning estate matters while the question here involved was not before those courts, yet the sale of the Collieries property appears to have been considered as made by the executor and not by the corporation itself.

The executor first suggested the sale. The executor found that the Federal estate tax and the Missouri inheritance tax together would probably exceed $800,000 and that the liquid assets of the estate were only nominal in relation to the amount involved. Mr. Shepley, representing the executor, realized also that in determining what property should be sold the approval of the heirs must be had in advance for without their consent litigation would be probable.

To secure the consent and cooperation of the widow and heirs, if possible, in the sale of the Collieries, the executor as sole stockholder selected a board of directors for the corporation consisting of the widow, some of the heirs and Mr. Geissal, who had been the manager of the corporation's business for Sternberg, and Mr. Shepley and other employees of the executor. A majority of the board were officers or employees of the executor. Because of his knowledge of the affairs of the corporation and the value of its assets Geissal was elected president.

Since it is admitted that plaintiff as the only stockholder effected the final sale and transfer of the assets the question for decision is whether all the facts show that the liquidation and sale were genuine and not a sham. If found to be genuine the sale "cannot be attributed to the corporation for tax purposes." United States v. Cumberland Public Service Co., 338 U.S. 451, 455, 70 S.Ct. 280, 282, 94 L.Ed. 251.

But three witnesses were called to testify at the trial, two for the plaintiff and one for the defendant;...